Quote from BlowFish:
I guess what I am wondering is whether they present a reasonable fallback position if you do not see other signs you are on the wrong side?
Consider for a moment how you decide whether the market has signaled continuation or change. As I posted several months ago, one can perform a simple drill to determine at the
end of a bar (close) which signal the market has provided. Most people following this thread will, no doubt, find themselves in a situation very similar to what follows.
Some bars quite easily show continuation, while other bars quite easily show change. A third category of bars appears 'confusing' to the trader. For now, we shall name the set of bars which fall into this third category 'uncertainty.' Most of the bars which fall into the 'uncertainty' subset represent some part of a formation (Lateral, Pennant, etc.), or at worst, a flaw (Dip, Hitch, Stall, HVS, CCC). At some point
after a bar (which falls into the 'uncertainty' category) another bar begins which you
know as continuation or change.
Since we are operating (in the above example) at the end of the bar, can easily then draw our lines in the sand differentiating between our temporary areas of 'uncertainty' and those areas which we
know signal continuation or change. One then needs to do nothing but wait while Price moves out of these areas of 'uncertainty' and into the areas where we
know what must come next.
With time and experience, these areas of 'uncertainty' shrink in both size and number, until the trader arrives at a place where no mater what follows the current bar, the trader automatically knows what must come next. unfortunately, the transition from such a state takes more time than most people want to admit. However, for now we can use The ES Chart (in conjunction with PRV, Channels and Gaussians) to 'light the way' through an area which a trader might find falls into an area of 'uncertainty.' Rest assured that
every bar falls into a category of continuation or change, but such knowledge does not help if a trader cannot 'see' the difference. As such, mentally create a place where 'uncertainty' can play itself out, while one
waits on the signals for continuation or change to materialize from your
own point of view.
By example, How many times has the scenario pictured below occurred during a trading day? How many times have people wondered, "Is this an FTT? Do I have change here? Should I reverse?" The example drawn below (See Attached) shows Price moving quite a distance downward, and then bouncing back up off its low to close some distance above the low. The next bar opens 'inside' the previous bar. Did the YM show Change? Did Str-Squ signal? Was there a DOM Wall? Did I miss an OTR Spike? Surely many have had these same thoughts run through their mind. What I intend for everyone to understand is that no such concern need exist.
At this
exact point in time, things may appear 'uncertain' to may. Will price continue downward? Will Price reverse and head higher? One need not know these answers just yet. If one already has a short position, concern over 'giving back' profits already accumulated surely exists in the minds of many. In addition, if one is sidelined waiting to enter, concern over if
this is a Point One (or Three) plays a role in indecision. Again, none of these concerns need materialize. At this
exact point in time we have a 'Forming Pennant' pictured below - meaning, if the bar closed
right now, everyone could agree we have a Sym Pennant showing on the chart. does
that sound like an area of 'uncertainty' or does everyone know exactly what a Pennant looks like, and what action to take when one arrives?
As a result, at this
exact point in time, no need for concern exists because what
must come next before one has either continuation or change is
another formation. Price cannot transition from its current position unless and until it moves through a Flat Top Pennant or a Flat Bottom Pennant. Sure, Price could move very quickly from where it is now to where it plans to go, but it must transition through another point before it can break the high, or break the low, of the preceding bar. While waiting for Price to move, the trader has time to contemplate what might come next in an effort to understand what
must come next. Price can move up and break the high of the preceding bar, Price can continue lower breaking the low of the preceding bar, or Price can hold steady and not move very far at all from where we see it now. If Price moves higher, then we most certainly have change. If Price moves lower, then we definitely 'see' continuation. And finally, if Price holds steady through to the close of the bar, then our forming Pennant became an actual Pennant, and we begin the whole process over again.
Certainly, the market has provided other signals during this five minute bar, but no need to concern ourselves with those for now. Simply, by using
only the ES Chart, we can all but eliminate these temporary areas of 'uncertainty' and transform them into periods where we simply
wait to make a decision or take action.
For If1-If2, simply do the drill described and 'see' for yourself where it fits in best. I believe what you find will change your outlook from one of stress to one of calm.
I hope you find the above useful.
- Spydertrader
